In November, I asked if Motley Fool Global Gains pick Melco Crown (Nasdaq: MPEL) was worth doubling down on? At the time, Las Vegas Sands (NYSE: LVS) was the hottest stock in gambling, but Melco looked like a stock that needed to play catch-up. A few readers thought I was a real fool for picking Melco, but I wasn't bluffing on this pick. How have casino stocks done since then?

Stock

Nov. 30, 2010

Jan. 14, 2011

Price Change

Melco Crown

$5.97

$7.55

26.5%

Las Vegas Sands

$50.08

$48.07

(4.0%)

Wynn Resorts

$101.10

$118.82

17.5%

So what is driving Melco Crown higher? There are three dynamics pushing this stock, and all of them should help Melco keep up its run into 2011.

  • Improving EBITDA margins: In the third quarter, EBITDA margin improved to 16.9% from 12% in the second quarter. This still lags behind the 31.3% margin of Las Vegas Sands, but Melco is catching up.
  • Prime property on the Cotai Strip: The city of dreams sits in the center of the Cotai Strip, and as the area is built out, the property will benefit from more visitors to the area.
  • Lower valuation: Melco has a 19.5 enterprise value/EBITDA ratio, lower than Las Vegas Sands (28.0) and only slightly above Wynn Resorts (18.3). The stock is catching up to competitors quickly, and as Singapore adds rapidly to Las Vegas Sands' EBITDA, that stock may look cheaper, but Melco isn't looking terribly expensive considering growth and margin improvement.

Las Vegas Sands has its own problems lately, losing sites 7 and 8 on the Cotai Strip. If the project goes up for bid, Melco is one of the few companies with the ability to bid on the project. Wynn Resorts already has its land on Cotai and is conservative enough to avoid biting off more than it can chew. MGM Resorts (NYSE: MGM) has a site in Cotai and a boatload of its own problems. Las Vegas Sands has projects at sites 5 and 6 being built now and another huge project in waiting on Site 3. For Melco shareholders, this is like owning a free call option on the Cotai Strip. If the company doesn't get the project, there's no loss; if it does get it, it's a huge win.

Do you think Melco Crown's stock will continue to outperform rivals? Leave your thoughts in the comments section below.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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